Mutual Fund News

The comeback kid of the oil patch

Bruce Chernoff, oil patch entrepreneur and founder, Canoe Financial

TORONTO -- Bruce Chernoff has made a lot of money by investing when, he says, "there is blood in the streets." But for a few months after the 2008 crash, it was his own blood flowing on the pavement.

The Calgary oil and gas investor, known for his adroit timing, was staggering from a flurry of unkind cuts. His oil company, Harvest Energy Trust, had taken a hit when Ottawa lowered the boom on income trusts in late 2006, and was further maimed two years later by the stock market meltdown.

Meanwhile, he made a foray into financial services by buying a fund management business on the eve of the crash, only to watch its asset base crumble. To add to the agony, he agreed to buy a ski cabin in Fernie, B.C., at the peak of the market, and saw mountain property values dive.

"My pants were down around my ankles on all fronts," he says, grimacing at the memory.

It was a defining moment in the education of the man who is one of the oil patch's most resilient investors. Mr. Chernoff epitomizes a new wave of younger titans who, through bitter experience, have learned to live with market volatility, production bursts from new technology, and alarming price gaps between Western heavy oil and the world's benchmarks. He had a hand in founding brand-name companies - such as Pacalta Resources Ltd.,Petrobank Energy and Resources Ltd., and Harvest - and yet remains the most important Canadian energy tycoon whom nobody knows.

Mr. Chernoff was able to rebound from his all-fronts debacle, but there was no magic to his comeback - he just gutted it out. "I couldn't control what was happening in the world, and stressing about it wouldn't be constructive. Whatever was going to happen was going to happen."

What happened was that Korea National Oil Corp. in late 2009 paid $1.8-billion net of debt for Harvest, providing a handsome premium over the market price. As for his investment fund company, it retrenched and waited for the recovery, which came as markets bounced back. The Fernie place? It has proved to be a hit with his three kids, all under 12. The fund management business he had bought, which was running the EnerVest group of closed-end funds, is now rechristened Canoe Financial LP, and with $1.6-billion under management, is pushing out into the mutual fund marketplace with the help of a high-profile partner - author, former Dragons' Den star and investment banker Brett Wilson, a friend of Mr. Chernoff for many years.

But building a new mutual fund brand means a rare public selling job for the very private Mr. Chernoff, who has reluctantly agreed to meet a journalist at, appropriately enough, the Canoe restaurant high above Toronto's Bay Street.

Mr. Chernoff is known for being media-shy but turns out to be an entertaining raconteur with a colourful turn of phrase, as he dips into the mushroom soup and duck pasta. He looks younger than his 47 years, with more the appearance of a lean, weathered rodeo cowboy than a fat-cat financier. And he is actually a weekend cowboy who dabbles in amateur riding and roping, skills he hones on a 60,000-acre spread south of Kamloops in the prime cow-punching country of the B.C. Interior.

"I've been bucked off four times but I've never hurt myself," says Mr. Chernoff. He could just as easily be talking about his 30-year ride as an investor, which began back in high school in Calgary when he became interested in trading stocks. He went east to Queen's University in Kingston, Ont., to study engineering in the footsteps of his geologist father, Michael. He got his degree, but was not a great student, largely because of an active social life and a continuing distraction in share-trading.

The trading, mostly in mining stocks, bought him a nice car and stereo on graduation, but he has never used his degree in a direct way. He does not regret the four years: He views engineering as a good analytical building block for a lot of careers. After Queen's, he spent a year in Toronto as a commodity trader. Missing the West and the mountains - he was a ski racer as a kid - he went out to work with his father, who had acquired a little mining shell company in Vancouver.

The Chernoffs converted the shell into a shallow gas producer called Pacalta, and Bruce learned the business under his father's tutelage. He had trouble finding oil and gas talent on the West Coast, so he came back to Calgary to set up shop.

Pacalta also had a chance to acquire some intriguing oil and gas properties in Ecuador, and Mr. Chernoff decided he had little to lose. He enlisted a petroleum engineer named John Wright to run the company in Ecuador and the two of them collaborated in forming yet another company called Petrobank. Those Ecuadoran assets became highly coveted, and in 1999, the Chernoffs sold Pacalta to Alberta Energy Co. (later known as Encana) in a $1-billion deal - a number that owed much to the spade work of Brett Wilson, who was then running FirstEnergy Capital in Calgary.

The Pacalta windfall set Mr. Chernoff up as a player at age 34. He found that he enjoyed starting companies and putting together the pieces of the puzzle - organizing assets, building management teams, finding the lowest cost of capital. "It is something I love to this day," he says.

Mr. Chernoff parted company with Mr. Wright, as the latter went off to build Petrobank and its affiliates. Mr. Chernoff, meanwhile, turned to buying mature - often unloved - conventional oil leases at a time the market was focused on natural gas, and he assembled the land in an income trust called Harvest.

"Harvest was a ton of fun," he says, and everything was coming together nicely until Halloween, 2006. Harvest was in the middle of financing its Newfoundland refinery when Finance Minister Jim Flaherty pulled the plug on income trusts' tax breaks. The financing fell apart, Harvest lost its edge in cost of capital, and was up to its neck in debt before the South Koreans rode to the rescue.

At one point, Mr. Chernoff became concerned about being personally overinvested in oil and gas, and decided to diversify by buying management of the EnerVest funds. He assumed he could bring a new growth model, and paid $185-million for the management contracts, which he realizes in retrospect was far too much. With the flagship EnerVest Diversified Income Trust, he figured: "I was buying a management fee on the market and so how bad could the market get?"

Real bad, it turned out. Who knew that in the 2008-2009 meltdown, the fund would lose 60 per cent of its value? It was the darkest time of his investing life and the only option was: Suck it up. "You run out the hard helmets and flak jackets, and you kick your boots up, tie your laces and stabilize the business. The world wasn't going to end, and you had to stay in the game. "

Now he and Mr. Wilson are working at being players in the hotly competitive world of mutual funds, as well as its traditional line of closed-end products. "We're not trying to take over the world," he says, but Canoe aims to be a high-end niche player. A unique selling feature is its Calgary base and strong energy-industry insights in the investment team, he says.

Besides Canoe, and his oil and gas assets, he is involved in power generation, and has invested in a rail venture that, in the short term, would help to break the transportation logjam for Alberta crude. "It is a piece of the puzzle," he says.

He agrees the energy market is a head-scratcher, with no signs of a clear route ahead. On the surface, every investment seems fair game, he says, because technology has unlocked once-dormant fields. But after the supply revolution spawned by hydraulic fracturing and horizontal drilling, the market is stepping back a bit.

Shale energy has changed everything on the supply side, but he sees steep decline rates in production from wells using multiple fracturing methods. "We frack these wells but within a year they go from 1,000 barrels a day to 100 or less," he says. "I think there will be a little pause for thought, as the industry asks whether it can get a proper return on its investment."

After the debacle of 2008-2009, he is a more patient investor now, and believes there is still plenty of turmoil ahead in oil and gas.

Opportunities should present themselves to an investor like him, who is "not afraid to get into something messy." But before he makes a big move, Mr. Chernoff still relies on the credo that has served him well - there needs to be blood in the streets.

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CURRICULUM VITAE

Personal

Born in Calgary; 47 years old.

Earned a bachelor of science in chemical engineering at Queen's University.